Power Outages in the Retail & Franchise Sector
By Trudi van Niekerk
South Africa is currently going through a power crisis as a result of demand exceeding supply as illustrated in the chart below. Industry, business & households have been asked to cut consumption up by 10% until 2010 to stabilise supply. In order to meet demand Eskom will have to increase electricity prices threefold over the next decade.
At this point in time is still early to clearly measure the impact of the power cuts on retailers. However larger (listed) retailers cope better than the smaller retailer retailers who can’t afford to install a generator. Most of the large retailers like Woolworths, Massmart & Pick ‘n Pay have generators in most of their stores. The exception to this being if the outlets are located within malls.
Massmart reported that the power cuts had not seriously affected its trade as yet, but that it was difficult to estimate the effect of future failures without a clear idea of their extent. They also mentioned that the outages had cost an estimated R 103,000 for every two-hour power cut suffered by the entire group. Power cuts cost the group only 0.2% of its trading hours.
The outages have had massive impact in shopping malls which only have sufficient back up energy to power essential services such as emergency lighting. Even though some of the larger retailers having their own back up power in malls, footfall typically disappears during and takes time to return after a power cut. This affects both large & small retailers.
Fast food restaurants, which are typically found in shopping centres, suffered a drop in sales of as much as 40% in January due to power cuts. They can’ install generators because most shopping centres do not allow individual tenants to have their own generators.
Running generators has been cited as costing between 6-14 times more than using electricity. This coupled with the deterioration in consumer spending and shopping centre rental escalations of around 15% will have a major negative impact on the smaller players going forward.
Owners of shopping centres are faced with huge costs as well as safety considerations as they decide whether to invest in generators to keep malls trading. For big centres like East Rand Mall and Sandton City the cost of a generator could come up to ??R80 million. These costs are more than likely to going to be passed onto tenants.
Many of the majors believe that the installation of generators is the responsibility of the shopping centre owners. The problem is the exorbitant charges which they are wanting to pass on to tenants. Another issue is the amount of electricity which a shopping centre consumes. A centre such as Century City consumes more electricity than what a small town does.
Eskom’s early March announcement that it may look at banning electricity permits for any new construction projects that would require more electricity than the average household, if enacted, could effectively halt most new construction projects in the country. Feedback from the majors is that the roll-out of new shopping centres is already being delayed. This has put a serious damper on the expansion plans of many of the retail majors as well as the franchise brands.
The reduced possibility of growing turnover through expansion therefore places more pressure on the majors to improve margins and turnovers at existing outlets. But with the deterioration in consumer spending and continued NCA implications the chances of growth are depressed even further.
What the Majors Have To Say
Shoprite (Carel Goosen Deputy MD): Most stores where equipped with generators last year. There are about 90 that don’t have generators yet, mostly KZN, which will all get them soon. Head office and DC’s also have generators, except for one small warehouse in Durban (to be put in soon). R40M was spent last year on generator installations; another R30m is budgeted for this year. Generally, stores can cope with 2 hour blackouts, but not when they run for 6-8 hours as stores have back-up power for their trading sections but not the storage areas. If power cuts of longer duration persist, the storage areas will also have to be covered. The convenience trend might even escalate if customers want to store less at home and shop more often. This won’t be a problem and offers an opportunity to pick up some business from smaller operators that are struggling.
Spar (Rodney Coe, FD): Identified it as an issue last year and have increased or will increase warehouse generator capacity where necessary. All DC’s have generators; except for KZN (will be resolved soon). Very few of the retail base of 810 stores have generators at the moment. Guild is encouraging members to put them in and many have committed to do so. This is an enormously expensive exercise: the expense per DC is R6m to R8m and instilling them in the stores will cost R200,000 to R500,000 each depending on the size. Shrinkage and refrigeration disruption are big issues too.
Massmart (Grant Pattison, CEO): Not much effect on trading. The group’s stores are still operating when there are power cuts by using their own generators. Some Game and Dion outlets are in malls ‘ these are adversely affected as they don’t have generators yet. It costs more to run generators, but there is some offsetting benefit to sales. They are seeing big demand for products that help to alleviate electricity shortages like generators, batteries, candles, emergency lighting products and fuel containers. They are sourcing as much stock in these products as possible at the moment.
Woolworths (Paul Simpson, Head of Property): Only two corporate stores don’t have generators and these will be installed next month. Key refrigerators facilities and part lighting is covered, so at least they can continue trading during the blackouts. It is difficult to say whether food or clothing will be worse off. The network of standalone food stores will help the group to withstand the impact as it is more obvious to customers that they are open for business when electricity is out. However, it is a different story in the malls. Even though Woolworth’s stores are up and running, the smaller shops in the malls aren’t and customers tend to say away. There is a perception issue that must be addressed. They are looking at ways of proactively reducing power consumption.
Truworths (Tony Taylor, Deputy MD): It is a big problem as lost turnover is often gone forever. Stores on the high street have generators: head office too. However, most stores are in the shopping malls and these don’t. They think it is the owners’ responsibility to put them in, but they want to charge retailers an exorbitant amount. Some agreement will have to be reached with the mall owners. Shopping centres use so much electricity that they will have to do something to ease the load. Besides turning off lights or air conditioners, it might be an option to close malls for an hour of two during peak electricity usage times.
Foschini (Ronnie Stein, FD): It is definitely having an impact on stores in shopping centres; other stores are not affected as much. At this stage, it is difficult to say what the financial consequences will be. Head office and distribution facilities have generators.
Ellerines (Reg Rawlings, FD): They have generator coverage at head office but not at their stores. They have uninterrupted power supply (UPS) on most terminals, but this lasts for a few hours. They are at the mercy of government and Eskom as the power cuts definitely affect their trading. The diversified spread of outlets across the country helps a bit as there is not blanket load shedding; it happens in pockets. They haven’t estimated the financial impact yet, and there are no plans to invest in generators for the stores at this stage.
Lewis (Kenny van Aardt, Director: Corporate Affairs): Installed a generator at head office two years ago, but don’t have generators in any of the stores. They don’t think that trading will be knocked too badly and don’t have any plans at the moment to put in generators. Compared to their peers, the stores are small ‘average 400m2 to 500m2 ‘ and generally not in malls so they can use natural light to some extent. The power cuts make doing business more labour intensive as store staff has to duplicate some functions. Small operators make up much of the company’s supply base and many of these companies are considering putting in generators.
Contribution by Trudi van Niekerk